Exclusive: CFTC insiders blow whistle on position limit rule

Sep 15, 2011, 9:57 a.m.

By Sarah N. Lynch

WASHINGTON (Reuters) - Internal strife at the Commodity Futures Trading Commission over how to craft a workable rule to crack down on speculation in oil markets has prompted two internal whistleblowers to ask the agency's inspector general to step in.

The whistleblowers say the CFTC team working on the politically charged "position limits" rule has suffered staffing setbacks.

It has also struggled to harmonize the proposal with another rule, potentially forcing commissioners to vote in coming weeks on a doomed-to-fail measure.

Last year's Dodd-Frank financial oversight law gave the CFTC the ability to prevent excessive speculation in the commodity markets by clamping down on how many total contracts any one larger speculative trader, such as Goldman Sachs or Morgan Stanley, can control.

Some lawmakers have pressed the CFTC to rush out position limit rules, turning up the heat this summer as U.S. oil prices hovered around $100 a barrel and consumers paid nearly $4 a gallon for gasoline.

But market participants have argued there is no reliable economic analysis proving that position limits curb excessive speculation.

The CFTC has already missed a deadline in the Dodd-Frank law to finalize position limits. Three of the five commissioners at the CFTC, including one Democrat, have expressed skepticism that position limits can prevent large run-ups in prices.

CFTC Chairman Gary Gensler had hoped to get the measure approved in September, but now it is expected to be pushed into early October.

INSPECTOR GENERAL

The complaints suggest there is strong internal dissent over the position limits policy -- something the derivatives industry could seize on as it tries to fight back against the plan.

CFTC Inspector General A. Roy Lavik confirmed receiving both complaints. They mark the first time his office has received complaints concerning a Dodd-Frank rulemaking.

CFTC spokesman Steve Adamske declined to discuss the complaints or their allegations.

Vermont Senator Bernie Sanders, a staunch supporter of strict position limits, said he was concerned on hearing about the whistleblower complaints, and he urged the agency to craft a workable rule.

"If true, this is outrageous and it has to stop," he said after learning about the complaints from Reuters. "For eight months, the CFTC has thumbed its nose at this law and the American people have been paying the price."

In an email to Reuters, an individual writing under a pseudonym said that the CFTC inspector general has received anonymous e-mails and letters slipped under the door in recent days to complain that the CFTC's final position limits rule cannot be implemented.

The whistleblowers say a recent version would require the use of over-the-counter derivatives data that the agency does not collect.

The complaint emailed to Reuters discusses the reasons why the position limits rule is flawed and also accuses the position limits rulemaking team leader of kicking senior employees off the team, and replacing them with staffers who have very little experience, either at the CFTC, or in the industry.

"Gutting out the intent of the position limits as required by Dodd-Frank, wasting taxpayer monies, steamrolling over other staff, proposing a rule that cannot be implemented, is wasteful," said the anonymous complaint, which was e-mailed to the inspector general's office on August 31. "I hope you investigate before it is too late."